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Were Hedge Funds Right About MACOM Technology Solutions Holdings, Inc. (MTSI)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s analyze whether MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) has experienced an increase in hedge fund sentiment lately. MTSI was in 18 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 15 hedge funds in our database with MTSI positions at the end of the previous quarter. Our calculations also showed that MTSI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 41 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We are probably at the peak of the COVID-19 pandemic, so we check out this biotech investor’s coronavirus picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to review the new hedge fund action encompassing MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI).

How are hedge funds trading MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI)?

At the end of the fourth quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the third quarter of 2019. On the other hand, there were a total of 15 hedge funds with a bullish position in MTSI a year ago. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Yiheng Capital was the largest shareholder of MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI), with a stake worth $84.8 million reported as of the end of September. Trailing Yiheng Capital was D E Shaw, which amassed a stake valued at $79.1 million. Royce & Associates, Intrinsic Edge Capital, and Arrowstreet Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Yiheng Capital allocated the biggest weight to MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI), around 7.44% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, earmarking 1.1 percent of its 13F equity portfolio to MTSI.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Intrinsic Edge Capital, managed by Mark Coe, assembled the largest position in MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI). Intrinsic Edge Capital had $8.8 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $6.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, Minhua Zhang’s Weld Capital Management, and Michael Gelband’s ExodusPoint Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) but similarly valued. These stocks are PJT Partners Inc (NYSE:PJT), Usa Compression Partners LP (NYSE:USAC), Hub Group Inc (NASDAQ:HUBG), and Matson, Inc. (NYSE:MATX). All of these stocks’ market caps are closest to MTSI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PJT 20 156297 3
USAC 8 19195 4
HUBG 19 285556 -4
MATX 10 5900 0
Average 14.25 116737 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $117 million. That figure was $224 million in MTSI’s case. PJT Partners Inc (NYSE:PJT) is the most popular stock in this table. On the other hand Usa Compression Partners LP (NYSE:USAC) is the least popular one with only 8 bullish hedge fund positions. MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately MTSI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MTSI were disappointed as the stock returned -18.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Disclosure: None. This article was originally published at Insider Monkey.

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